An Insider's View of Lending and M&A in North Carolina

W. Swope Montgomery Jr. has been the president and chief executive of the $2.2 billion-asset BNC Bancorp since its founding almost 20 years ago.

BNC survived the financial crisis and bought the failed Beach First National Bank in Myrtle Beach, S.C., from the Federal Deposit Insurance Corp. in April 2010. The High Point, N.C., bank secured $35 million — and a commitment for more capital — from private equity groups two months later to spend on internal expansion and acquisitions.

In a wide-ranging interview Tuesday at BNC's corporate office, Montgomery discussed the halting recovery of the North Carolina market, details of BNC's efforts to find more revenue and his cautious but optimistic outlook on deals. The following is an edited transcript.

How would you sum up the banking environment in North Carolina? What can be done about lending challenges and the imbalance in banks' balance sheets?
SWOPE MONTGOMERY: It's still stressed with high unemployment and real estate issues. It is a market that is slow to recover. I don't really see a stimulus at this point to allow banks to recover just because of the economic impact. In this environment is it important to have good asset quality and access to capital and liquidity.

When we look at the investment opportunities on the bond side there aren't a lot of attractive options. And to deploy those funds on the loan side, where there is of course more risk, is challenging. We've really gone into new markets and diversified.

In the last year, we have opened a full-service office in the Raleigh market and hired a team of bankers there. We've done something similar in metro Charlotte recently. We actually have had loan growth in the last 12 months of over 10% on our noncovered assets. The only reason is because we have gone into markets that are growing and will recover more quickly.

What roles do your private equity partners have in shaping strategy and M&A?
We established a relationship last June primarily with Aquiline [Capital] Partners. We spent about six months with them in 2010 letting them do due diligence, and they came in with a very attractive deal basically at our tangible book value at a time when we saw other banks raising capital at 30%-40% of tangible book.

Aquiline has a seat on our board. Initially that was Mark Graf, a former CFO at Fifth Third Bancorp with a great banking background. He was a great resource and was not a micromanager. He has become the chief financial officer at Discover Financial. We now have [Aquiline senior advisor and former Wachovia Corp. CEO] Ken Thompson on our board. We worked together at First Union in the late 1980s and I have a high regard for what he has accomplished in his career. I have found him to be a great resource and having grown up in North Carolina he has an understanding of our markets that is very helpful.

Aside from an FDIC deal in South Carolina, we haven't seen a lot of M&A from BNC. Why is that?
We've looked at a lot of assisted deals. We've bid on five other FDIC-assisted deals and have not been successful. We will continue to look at FDIC deals, do our due diligence and come up with a number that we think makes sense for our company. We are not out there to just win a deal. We've looked at some whole bank opportunities, but our feeling is that we have a franchise to protect and a great relationship with regulators. To take on a wounded franchise is not really what we think we should be doing right now.

On the other hand, we're seeing private equity platforms doing deals where they are willing to take on a little more risk and may have a bit more dry powder than we do. Those are the only deals we see getting done in North Carolina for that reason. We think this time next year there will be consolidation opportunities as more companies fully realize problem assets and as regulators have conversations with boards of directors. We're in the middle of a nine-inning game where some people are more self-aware than others. We're well-positioned to take advantage of that scenario.

Have you been surprised at the amount of private equity money going into North Carolina banks?
It is surprising. A few years ago we had a meeting at the FDIC's regional office in Atlanta. At that time, we asked them about PE firms and their position then was that it would be rare for them to allow such deals because [private equity firms] lacked the infrastructure. Something has changed in that regard. I'm concerned about that. If they don't have the infrastructure from day one, how is that going to play out? How are their investors going to get a return? It will be interesting in the next few years to see how they perform.

What do you think of the PE-led merger of FNB United and Bank of Granite in North Carolina?
They feel as though they have their capital together, but it hasn't gotten regulatory approval yet. I hope the deal gets done because nobody wants to see anyone fail. Both banks have been under stress for some time. We looked at both of those banks but decided neither made sense at the time. Again, if I am an investor in that deal, it is hard for me to understand how you get a return anytime soon. Perhaps it is a long-term play.

Where is BNC going to find growth?
We've been looking at the mortgage business in a serious way for several years. We looked at buying a platform at one point, but earlier this year we brought in a senior executive from a regional bank in Charlotte. He brought with him 40 people who are headquartered in Charlotte but will be serving our other markets. We are gearing up for mortgage to be relevant. We absorbed all the start-up costs earlier this year and expect to be profitable or break-even this quarter. We are looking at the fourth quarter as being very profitable going forward and can add 20-25 cents a share over the next 12 months.

We also added [Small Business Administration] lending. We recruited a person in Raleigh with 20 years of experience in that business. We absorbed the start-up costs already and have a pipeline of $10 million in deals. We also hired someone in the Charlotte market. The [commercial and industrial lending] business involves recruiting talent from a lot of other companies. We are better prepared for the C&I business going forward.

How do you get the bank to $5 billion of assets?
Acquisition opportunities are a little bit ahead of us. We've done well at organic growth, and we'll continue to devote resources to opening new offices in markets like Charlotte and Raleigh where unemployment will improve and we think opportunities will be better. When you look at acquisitions opportunities, we want to buy a bank with a good core deposit franchise. We've been more of a commercial bank that relied on wholesale funding historically. We have dialed that back significantly in the last two years. We've added $600 million in core deposits just in the last 12 months to take our wholesale reliance down to a much lower level.

After 40 years in the banking industry, particularly the last five, what keeps you in the business?
It is challenging and exciting. I have never seen a time with more opportunity than today. The exciting thing is that we have positioned our company to attract the type of talent that makes me excited about our future. We've surrounded ourselves with folks that really have the drive, energy and focus and understand what it takes to be successful. That's why I come in every day.